Harmonizing a Three-Headed Regulatory Monster

By Graham Noyes, Low Carbon Fuels Coalition, and Doug Durante, Clean Fuels Development Coalition

Special to The Digest

Widely considered to be Godzilla‘s arch-nemesis, King Ghidorah (キングギドラ) is a three-headed dragon kaiju that first faced Godzilla in the 1964 Godzilla film,  Ghidorah, the Three-Headed Monster.

While not as entertaining to watch as a Godzilla film with a three-headed flying monster, the current regulatory struggle over national auto standards between the US Environmental Protection Agency (EPA), the National Highway Traffic Safety Administration (NHTSA), and the California Air Resources Board (CARB) is a high stakes battle between determined stakeholders. Viewed through the tactical lens of the ethanol industry, this regulatory drama sets the stage to restore manufacturing incentives for autos and light trucks that utilize mid-level and higher ethanol blends to reduce petroleum use and increase vehicle efficiency. Since EPA eliminated key crediting provisions for flex fuel vehicles (FFVs) after model year (MY) 2015, this rulemaking is likely the ethanol industry’s last shot to remain a contender. Here is a quick look at the current battle, how the federal programs determine what vehicles get built, and how a couple of mechanical fixes could keep FFVs on the road and pave the way for high octane vehicles (HOVs) that utilize engine downsizing, turbocharging, and other advanced technologies.

Early in his term, President Obama announced a unified national auto policy that set the strictest fuel efficiency standards for new cars and trucks in American history. As part of the agreement, the major foreign and domestic auto companies signed letters promising not to challenge the new standards in court, and the state of California deemed compliance with the federal standards to be compliance with California’s GHG standards. Generally speaking, the federal standards require an estimated combined fleet-wide average (including autos and light trucks) of over 42 mpg by 2020, and over 48 mpg by 2025. Due to the extended time horizon, the agreement contained a mandatory Mid-Term Evaluation to determine if the standards, and the assumptions behind them, were still “appropriate”. That evaluation was to have taken place over an 18-month period but the outgoing Obama Administration rushed it through in just a few months, making the Final Determination an easy target for incoming EPA Administrator Scott Pruitt to re-open for a more detailed look. Depending on the outcome, changes to the federal programs could potentially unravel the unified national program, particularly if California re-instates its own standards. On the other hand, opening the rules and making program adjustments such as smart and fair fuel and vehicle crediting for ethanol blends would provide relief and savings to the automakers.

The devil is in the details of the complex and shifting federal programs with program components like the efficiency of vehicle air conditioning systems, dual fuel vehicle crediting, dedicated alternative fuel vehicle crediting, and off-cycle credits significantly impacting vehicle scoring. Under the Obama era standards currently in place, electric vehicles (EVs) are a game changing technology and therefore benefit from a suite of credit enhancers including bearing no regulatory responsibility for GHG emissions from the power generating source, being deemed 6.67x times more efficient than a conventional vehicle (California’s efficiency calculation for EVs is 3.4), and receiving a 2x credit multiplier in MY 2017. While FFVs had previously enjoyed favorable credit generating status (though never quite as favored as EVs), that changed dramatically between MY 2012 and MY 2020. To understand the nature and impact of the changes, it is necessary to separate out the two distinct federal programs: NHTSA’s Corporate Average Fuel Economy (CAFE) and EPA’s Greenhouse Gas Emission Standards (GHG) program. Lessons learned from how the variable crediting of FFV manufacturing impacted automakers’ manufacturing decisions provide valuable indicators regarding the importance of these programs to the roll-out of next-generation HOVs that can cost-effectively provide performance, fuel efficiency, and petroleum reduction.

During MY 2012-2014, strong CAFE and GHG crediting for FFV manufacturing stimulated substantial investment and dramatic expansion of the FFV fleet. FFV production peaked in MY 2014 when over 2.8 million FFVs were manufactured. During MY 2012- 2014, the automakers overall accrued 8-9 g/mi. of FFV credits each year; with US automakers GM, Ford and Chrysler heavily investing in FFV models and generating 14-17 g/mi. in FFV credits. The pending elimination of FFV credits caused manufacturing and credits to drop 6 g/mi. in MY 2015; but GM, Ford and Chrysler maintained strong FFV manufacturing programs and generated 12-13 g/mi. in credits. Subsequently, when EPA collapsed the regulatory value of FFVs to near zero in MY 2016, all automakers phased down FFV manufacturing. FFV production dropped to about 1.3 million that year, representing more than a 50% decline in two short years.

The drastic changes in FFV crediting methodology significantly impacted the overall GHG compliance profile of the automakers.   As EPA highlighted in Finding #1 of the Manufacturer Performance Report for MY 2016, the near elimination of the FFV credit in the GHG program was a major contributing factor to MY 2016 being the first year in which the auto industry generated an overall GHG emissions deficit of 9 g/mi. after having generated 7g/mi. of positive credits in MY 2015 and 12-13 g/mi. of credits in MY 2012-2014.

With the Mid-term evaluation underway, EPA Administrator Pruitt recently remarked that his agency is examining the role of fuels in enabling efficient vehicle technologies. This could be seen as somewhat of a reversal—letting fuels determine vehicle capabilities rather than the other way around.   This comment by Mr. Pruitt indicates an opening for the low carbon liquid fuels industry to achieve some level of parity with EVs that currently receive all manner of credit multipliers. If this opening is missed, the industry will be playing against other technologies on an uneven field of CAFE and GHG compliance for years to come.

What is truly exciting about this opportunity is that from an ethanol perspective it could offer something for everyone. In California where low carbon fuel is rewarded, the market for E85 has tripled in five years and FFVs are critical. In other states and regions where the high octane sweet spot for ethanol blends is in the 25-40% range for non FFVs, the same CAFE and GHG crediting mechanisms can be prorated to reward these mid-level blends.

The specific regulatory mechanical fixes necessary are for EPA to extend the current usage factor (known as the F-factor) to MY 2019 and beyond, and for EPA and NHTSA to harmonize the crediting for FFV manufacturing under the CAFE and GHG programs.  We also need to fix the so-called R factor which currently penalizes ethanol blends for a mileage loss. And finally, however one chooses to use ethanol, the carbon footprint of ethanol is demonstrably better than the power sources for EVs. Ethanol should therefore be treated as carbon neutral as is already the case for EV power. These changes can be implemented quickly and easily, will enhance automaker compliance with the standards and save money, and can be calibrated to recognize real world GHG and petroleum reductions. The FFV mechanisms can also be crafted to facilitate the CAFE and GHG crediting of high efficiency vehicles that utilize high octane fuels.

Our industry needs to argue strongly and with a unified voice on very specific mechanisms for the opportunity to contribute to the public policy goals of energy security, economic development, and reducing emissions. As it currently stands, the auto industry gets no credit for using our fuel to meet these objectives. While EPA and NHTSA are adjusting the CAFE and GHG programs, this deficiency can easily be rectified at no cost to consumers or taxpayers.